Thursday, April 8, 2021

The non-financial corporate sector in the institutional sector accounts

There are lots of reasons not the look at the figures for Ireland’s non-financial corporate sector in the quarterly institutional sector accounts (ISAs).  They are the figures that are most likely to be revised when the National Income and Expenditure (NIE) accounts are published in the summer.  And a much more information breakdown (by domestic, foreign-owned and redomiciled PLCs) will be published with the annual ISAs in the autumn. 

So, without expected it to be any more revealing that staring into a puddle here are the latest figures for the NFC sector.  First, the current account:

NFC Sector Current Account 2016-2020

Lots of big numbers as can be expected given the scale of the MNCs that operate in the sector.  However, most of the 2020 changes are fairly modest (at least they are in this release anyway).

We can see that compensation of employees paid by NFCs held up fairly well in 2020 only showing a decline of 2.5 per cent or €1.7 billion.  However, this was supported by the government’s wage subsidy schemes and subsidies on production received were up almost 500 per cent. The (mainly domestic) firms receiving these subsidies used them to support the wages of their employees.

Amidst all the big number we see the continued rise in Corporation Tax payments from this sector.  In 2020, the NFC sector paid €9.6 billion of Corporation Tax up from €8.4 billion in 2019. 

Another item worth noting is the continuing rise in the amount of interest paid by the NFC sector.  The interest amount in the ISAs rose a further €2 billion in 2020.  This may be linked to the onshoring of tens of billions of IP assets by US MNCs.

NFC Sector Capital Account 2016-2020

The figures in the capital account are even more murky – particularly those in the lower panel showing capital formation, acquisition of non-produced assets and net borrowing.

The NFC sector in Ireland has been doing an enormous amount of capital formation expenditure in recent years.  This has been to the extent that a €50 billion drop in NFC investment is of concern to no one.  This is because the main reason for the wild fluctuations in the GFCF has been IP onshoring by US MNCs.  These transactions can be worth tens of billions but their impact on the overall economy is limited.

The lower panel shows that their has also been significant expenditure on the acquisition of non-produced assets.  Again this is linked to IP onshoring but is IP that is not the result of R&D activity.  The assets here include licenses and marketing assets such as customer lists.  This shows a large drop in 2020, but, like capital spending, is a figure that is subject to revision in the NIE.

This means that the bottom line is not informative either.  The net borrowing position of the NFC sector may have improved by more than €70 billion but most of this is due to reduced onshoring of IP by US MNCs.  We’ll get a much better picture of what is happening in the business sector in Ireland, and most importantly the domestic business sector, as the CSO works through it release schedule for the year.

The government sector in the institutional sector accounts

The CSO will publish the 2020 Government Finance Statistics (GFS) in the next few weeks but we can get a preliminary look at what they will say from the Institutional Sector Accounts (ISAs) that were published last week.

Here’s the government sector current account for the five years to 2020.

Government Sector Current Account 2016-2020

For 2020, the most significant changes were subsidies paid (+€4 billion), social benefits paid (+€6 billion) and consumption expenditure on goods and services (+€5 billion).  All told, these contributed to a €16 billion deterioration in the current account position of the government sector.

One of the remarkable things is that all of these changes were on the expenditure side with revenue holding up.  There was a decline in taxes on products and production.  Taxes on products (such as VAT and Excise Duty) were down €2.5 billion with taxes on productions (such as commercial rates) down just under €1 billion.  Some of this fall was just to reduced activity while some was due to forbearance and payment breaks.

Taxes on income and wealth rose in 2020. This was entirely due to increased Corporation Tax from non-financial corporates which rose another €1 billion but taxes on income from the household sector (Income Tax and USC) were essentially unchanged in 2020.  Social contributions received (mainly PRSI) were also largely unchanged in 2020.

On the spending side some of the other changes were the eight per cent rise in compensation of employees paid by the government sector with this almost reach €25 billion in 2020.  It might be surprising the the GDP of the government sector rose seven per cent in 2020 (schools closed etc.) but in the absence of prices the value added of the government sector is mainly measured by the wages paid.  Finally from the current account, we can also see that the interest bill continued to fall and the interest amount in the sector accounts falling by a further €1 billion in 2020.

There were also limited changes in the capital account.

Government Sector Capital Account 2016-2020

The most significant change here was the further €1.5 billion rise in government gross capital formation in 2020 to reach €9.7 billion.

There was little change in most other items in the current account meaning that the overall change in the government’s non-financial position was a deterioration of €18 billion.  The government sector went from a modest net lending position of €1.5 billion in 2019 to a net borrowing position of €16.5 billion in 2020.

To the extent the the increased spending highlighted in the current account is temporary this deficit will fall as the need for emergency measures falls.  But if some of those represent permanent spending increases, as is likely, some of the deficit will be persistent.  It is that permanent increase in spending rather than any necessity to “pay the COVID bill” that will impact subsequent budgetary plans.

Thursday, April 1, 2021

The household sector in 2020

The CSO have published the Q4 2020 update of the non-financial Institutional Sector Accounts.  While there may be some revisions when the annual accounts are published later in the year, the quarterly data can be used to get preliminary figures for the year as a whole. 

Here’s the household sector current account for the past four years as well as the annual change in 2020.

Household Sector Current Account 2017-2020

The bottom section tells us that the disposable income of the household sector rose by just over four per cent in 2020.  The biggest reflection of the restrictions that were in place for much of the year is the nine per cent reduction in consumption expenditure.  This meant that the gross saving of the household sector almost doubled in 2020, reaching €28 billion and giving an unusually high savings rate of 23 per cent.

Although it looks like there was relatively serene progression in the aggregate income of the household sector in 2020 there was obviously a lot going on above that.  In overall terms, the compensation of employees received by the household sector was essentially flat in 2020 showing a fall of just –0.3 per cent.  This, however, masks a difference across sectors with all sectors bar the government sector showing a fall in 2020.

Compensation of employees from the government sector rose a further eight per cent in 2020 to almost reach €25 billion.  The increase since 2015 is almost 30 per cent.

GG CoE Paid 2006-2020

The nearly €2 billion rise in compensation of employees from the government sector almost fully offset the reductions elsewhere.  And those reductions would have been even larger were it not for the various wage subsidy schemes introduced which provided a subsidy to firms to support their wage payments to staff.

A little further down, we see that social benefits received by the household sector (excluding benefits in kind) from the government sector jumped from €24 billion in 2019 to €30 billion in 2020.  This increase was primarily driven by the Pandemic Unemployment Payment (PUP) though even the absence of this scheme there would have been an increase in these transfer as most, but not all, of the people impact would have been eligible for existing income supports.

And those are the most significant changes in the table.  It looks like there’s something going on with the FISIM adjustment but it seems to largely net out across interest paid and interest received.  There has been a reduction in contributions to private pensions in recent years. Social contributions paid to the financial sector have gone from €7.3 billion in 2018 to €5.9 billion in 2020.

This is perhaps surprising given the general increase in savings behaviour in 2020.  However, there was still a greater amount contributed to private pensions funds then paid out in benefits from those funds – the adjustment for pension entitlements in the second-last row was +€1.4 billion.

We can turn to the capital account to see what happened to see how the rest of the savings were used.

Household Sector Capital Accounts 2017-2020

Gross capital formation by the household sector was down in 2020, falling from €7.2 billion in 2019 to €6.8 billion in 2020.  This is probably not a surprise given that the main capital expense of the household sector is housing (purchases of new units and refurbishments of existing dwellings).  Restrictions would have reduced output in the construction sector.

The bottom line shows that most of the savings was carried through the capital account.  Net lending by the household sector exceeded €20 billion in 2020.  This means that most of the additional saving made its way to the financial accounts: higher deposits, lower loans and maybe increased investment in other financial assets but higher deposits and lower loans are likely to dominate.

To conclude here is the savings minus investment positions of the household and government sectors.  The figures shown are four-quarter moving sums.

Gross Savings minus Investment for Gov and HH 1999-2020

The turmoil of 2020 is clearly seen but is also noticeable is that as the year progressed the [S – I] deficit of the government sector was growing faster than the [S – I] surplus of the household sector.  The overall position across the two sector was still positive: if necessary the deficit of the government could be funded from domestic sources. 

Maybe the next 12 months will see an erosion of that savings behaviour possibly to fund a consumption boom which, in turn, will boost the government’s position.  It doesn’t even need the accumulated savings to be unleashed, just a reduction in the savings rate.

Friday, March 26, 2021

Latest Country-by-Country Reporting Data for US MNCs

The IRS have published their aggregate statistics for the 2018 country-by-country reports filed with them by US MNCs.  The figures show that companies who came under the scope of the regulation made $7.9 billion of cash payments for corporate income taxes to Ireland.  This was a significant increase on on the $4.3 billion of tax payments that US MNCs made to Ireland in 2016 and the $5.2 billion paid in 2017.

Relative to the population in 2018 (4.857 million) the Corporation Tax payments of US MNCs were equivalent to $1,636, close to €1,400, for every person in the country.  This figure is likely to be larger now. In 2018, revenues from Corporation Tax totalled €10.4 billion, last year they were €11.8 billion.

The IRS reports show that these companies had 151,000 employees in Ireland in 2018 but the benefits of the their presence here extends well beyond that group.  In equivalent terms, it could be said that the Corporation Tax payments US MNCs are making in Ireland are covering the costs of the State pension which had 600,000 beneficiaries in 2018.

Whatever about the relative impact of these tax payments in Ireland, the relative size of them across the EU is remarkable.

IRS CbCR for the EU27 Tax Payments 2018

This chart is not done in per capita terms or as a percent of national income; it is just the nominal figures.  US MNCs make more corporate tax payments to Ireland than they do to any other country in the EU and by some distance.

In total, the MNC groups in the IRS data made $261 billion of cash tax payments in 2018.  Of those three percent were made to Ireland.  Indeed, Ireland was the third-largest of all recipients of corporate tax payments from US MNCs only coming behind the US itself ($140.6 billion) and the UK ($10.9 billion).

Here is a table of outcomes for ten selected jurisdictions as well as the U.S. itself and the outcomes “stateless entities” (most of which likely operate in the U.S.).  All of the figures in the main part of the table are taken directly from the IRS dataset. The last column on the right, average cash tax rate, and the rows at the bottom showing shares are calculated using the IRS data.  Also note that to get a more accurate indicator of the average tax rate the table is “limited to reporting entities with positive profit before income tax”.

IRS CbCR Average Tax Rates Selected Jurisdictions 2018

Assuming there is no double counting, the jurisdictions here account for around 80 per cent of the profit of the reporting groups in the data with the ten selected jurisdictions accounting for around 20 per cent of the total.  The jurisdictions are are ranked by profit before income tax.

This places the US at the top and it is followed by “stateless entities” while the top five of the selected jurisdictions are Bermuda, Singapore, Netherlands, Luxembourg and Switzerland.  Ireland is next.

Ireland would be top of this group if ranked by revenues, cash tax paid or tangible assets and would be third for employees (trailing Singapore and the Netherlands).  Ireland would also be first if the ranking was done by average tax rate.  Indeed, at 11.4 per cent of reported profits before tax, Ireland is the only jurisdiction in the table with an average tax rate that makes it into double digits.

For earlier years in the IRS data the equivalent average tax rates for Ireland were 9.4 per cent in 2016 and 12.8 per cent in 2017.

The IRS figures show that, in 2018, the US MNCs included in this table reported over $100 billion of profit in Bermuda and unsurprisingly paid very little tax there.  Similarly low tax rates are reported for the near $60 billion of profit in the Cayman Islands and the $12 billion in Barbados.

Profits of around $85 billion are reported for both Singapore and the Netherlands with $3 billion of tax paid in Singapore and $4 billion in the Netherlands.  Both of these have average tax rates of less than five percent.  The average tax rate for Luxembourg is even lower: $1 billion of tax on $68 billion of profit giving an average tax rate of 1.5 per cent.

Within the selected ten Ireland could be considered a bit of an anomaly.  Yes, there are large profits but relative to the rest of the group there are high tax payments, high tangible assets and high employee numbers. These conclusions would not be significantly altered if companies reporting negative or zero profit before tax are included.  For Ireland, those companies would add another 30,000 employees bring the total employment in Ireland of US MNCs in the IRS’s CbCR statistics to 150,000. 

The IRS also provide a breakdown of the effective tax rates by country.  They use accrued tax rather than cash tax.  Here is the 2018 breakdown for Ireland.

IRS CbCR Ireland by ETR 2018

The largest group are those with an effective rate of “10% to less than 25%” but there are also significant profits in groups that show an ETR of less than 10% and groups with an ETR of 25% or greater.

The data also gives a sectoral breakdown which we again show for Ireland.

IRS CbCR Ireland by Sector 2018

This shows that the most important sector from an Irish perspective is manufacturing which accounts for the largest share of all the items shown in the table.  There are three times as many employees in US manufacturing groups in Ireland as there are in information groups.

Outside of the selected ten jurisdictions one of the surprising results in the table could be just how low the tax payments to the US itself are.  The average tax rate is below 10 per cent.  It is seems the Tax Cuts and Jobs Act is living up to the first part of its name.

The average effective tax rate in the U.S. for companies reporting a positive profit was 17.6 per cent in 2016. It was 16.0 per cent in 2017 but fell to half of that in 2018, the first year the TCJA was in force.  This outcome is discussed in detail in a recent staff report from the Joint Committee on Taxation in the US Congress. (See section IV.B from page 57 of report JCX-16-21).

Maybe now there will be a bit more focus on the US being the tax haven for US MNCs.

Thursday, March 11, 2021

Changes in the Corporation Tax calculation for companies with no net income

In recent years we have been tracking companies whose net trading income is negative or nil in the Corporation Tax Distribution Statistics from the Revenue Commissioners.  One might think this would be a set of companies with little going on. One would be wrong.

Here is the aggregate corporation tax computation for companies with no net trading income for each year from 2014 to 2018 (latest available).

Aggregate CT Companies with no net income 2014-2018

The row of duck eggs for Net Trading Income are quickly evident but there are lots of big numbers above those zeroes.  Indeed, the set of companies with no net trading income were responsible for Ireland 26 per cent GDP growth rate in 2015.

The top line of the table is Gross Trading Profits and for companies with no Net Trading Income went from €13.5 billion in 2014 to €40.0 billion in 2015.  That increase drove the surge in GDP.

That increase was no linked to the surge in Corporation Tax revenues that began the same year.  The additional Gross Trading Profit were fully offset by Capital Allowances.  As we can see the amount of Capital Allowances available for these companies rose from €12.8 billion in 2014 to €38.4 billion in 2015.  All the extra gross profit was offset by capital allowances meaning no Corporation Tax was paid on those profits.

And for 2018 we can see that these profits have dropped out of this set of companies.  Gross Trading Profits for companies with No Net Income fell from €50 billion in 2017 to €18 billion in 2018. We will come back to where these profits ended up shortly.

The rest of the story for companies with no Net Trading Income is essentially one of Foreign Income.  Around three-quarters of the Taxable Income of these companies each year is Foreign Income. 

This is included in the Corporation Tax computation because Ireland has a worldwide regime with the profits of all resident companies subject to tax in Ireland, wherever earned.  Foreign profit will already have been subject to tax abroad and the only additional tax that would be due in Ireland is if the rate paid abroad was less than the relevant rate here. 

Given that Ireland’s Corporation Tax rate is lower than most other countries this means that very little additional Irish tax is due on the Foreign Income included in the Corporation Tax calculation.  That is main reason for the low effective rates shown at the bottom of the table.

So, back to those missing profits.  We can track them by looking for where the claims for capital allowances ended up.  Here are the claims of capital allowances by range of net income.

Plant and Machinery Capital Allowances by Range of Net Income 2014-2018

The top line shows the drop in capital allowances for companies with no net trading income.  Most of 80,000 or so companies who file tax returns with the Revenue Commissioners are not US MNCs.  The income ranges reflect that with the final category being for companies with a net income of more than €10 million.

We can see that the capital allowances moved down the table in 2018, but not all the way down. The increase in capital allowances can be seen in the row for companies with a net income of between €1 million and €5 million with these companies having €34 billion of claims for capital allowances.

That is a an incredible result with a huge gross trading profit resulting in a relatively tiny net trading income.  All bar a tiny amount of the additional profit for companies in this range of net income was offset by capital allowances.

As the previous posts noted these are profits and capital allowances linked to intangible assets.  These are assets (or maybe even just one!) that were moved to Ireland prior to October 2017.  Since then there has been an 80 per cent cap on the amount of profit in any given year that can be offset by capital allowances for intangible assets. 

This cap doesn’t apply to the profits in question here and we get €30 billion plus of gross profit being reduced to a net trading income of something between €1 million and €5 million.  This again shows that while intangible related profits were responsible for the surge in Ireland’s GDP they are not the source, yet, of the surge in Corporation Tax.  But when those capital allowances run out…